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Heavy Construction Outlook: Rosy on High Public Spending

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The Zacks Building Products - Heavy Construction industry consists of mechanical and electrical construction, industrial and energy infrastructure, and building service providers. The companies serve commercial, industrial, utility and institutional clients.

The industry players are engaged in engineering, construction and maintenance of communications infrastructure, oil and natural gas pipelines, and processing facilities for the energy and utilities industries. These firms are also engaged in dredging services in the United States and internationally.

Let’s take a look at the industry’s three major themes:

  • Construction activities in U.S. government projects have been on the rise over the past few quarters. Importantly, ramp-up in projects related to 5G — the next generation of wireless connectivity — has been a silver lining for the industry players. Importantly, Trump’s impetus to upgrade the nation’s highways, railroads, bridges and broadband calls for more spending in the near future, which in turn, will boost revenues and profits of construction companies.
     
  • The industry is poised to gain from a significant number of project awards across multiple segments, including communications, health care, transmission and power, and infrastructural projects in domestic as well as international markets. Again, owing to increased renewable project activity, and expansion of services in biomass and other smaller production facilities, the power generation and industrial construction market is poised to see sizable growth. Moreover, construction work for communications is expected to ramp up on huge investments in network expansion. Also, the proliferation of smartphones should drive demand for network bandwidth and mobile broadband. Notably, increased demand from telecom customers for wireline networks, wireless/wireline converged networks and wireless networks using 5G technologies has been benefiting the industry players.
     
  • However, rising employment costs to support revenue growth are hurting profit margins to some extent. Meanwhile, businesses of the industry players are susceptible to the cyclical nature of the markets in which clients operate and are dependent on the timing and funding of new awards. Hence, volatility in credits and operating risks associated with economic down-cycles are pressing concerns.


Zacks Industry Rank Indicates Bright Prospects

The Zacks Building Products - Heavy Construction industry is a 13-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #41, which places it in the top 16% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector & S&P 500

The Zacks Building Products - Heavy Construction industry has lagged the broader Zacks Construction sector as well as the Zacks S&P 500 composite over the past year.

Stocks in this industry have collectively gained 3.7% versus the broader sector’s growth of 24.6%. Meanwhile, the S&P 500 has gained 16.8%.

One-Year Price Performance


 

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing heavy construction stocks, the industry is currently trading at 10.8X versus the S&P 500’s 18.5X and the sector’s 15.6X.

Over the past five years, the industry has traded as high as 18.3X, as low as 10.4X and at the median of 14.8X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

 


Bottom Line

While rising costs are disturbing matters, a major boost in infrastructural and construction spending should continue to favor the industry. Solid growth in end markets like communications, transmission and power, and other infrastructural projects is another encouraging factor.

Below we present four stocks from the Zacks Heavy Construction space that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes Dredge & Dock Corp. (GLDD - Free Report) provides dredging services in the United States and internationally. The stock carries a Zacks Rank #1 and its EPS estimates for 2020 have witnessed upward revision of 7.5% to 86 cents in the past 60 days. It has an expected earnings growth rate of 10.3% for 2020.

Price and Consensus: GLDD


North American Construction Group Ltd. (NOA - Free Report) : This Alberta, Canada-based heavy construction and mining services provider has an expected earnings growth rate of 17.8% for 2020. The consensus EPS estimate for this Zacks Rank #2 company has moved up 1.3% to $1.59 for 2020, over the last 60 days.

Price and Consensus: NOA



EMCOR Group, Inc. (EME - Free Report) : This Norwalk, CT-based electrical and mechanical construction, and facilities services provider in the United States currently carries a Zacks Rank #2. The company has surpassed the Zacks Consensus Estimate in the trailing four quarters, the average beat being 10.2%.

Price and Consensus: EME



Dycom Industries, Inc. (DY - Free Report) , a specialty contracting firm operating in the telecom industry, currently has a Zacks Rank #2. The consensus EPS estimate for this Zacks Rank #2 company has climbed 0.4% to $2.82 for 2020, over the last 60 days. It has an expected earnings growth rate of 13.8% for 2020.

Price and Consensus: DY



 

Investors can also keep an eye on the below-mentioned stock with solid prospects.

Primoris Services Corp. (PRIM - Free Report) : This is a Dallas, TX-based specialty contractor and infrastructure company. Earnings for this Zacks Rank #3 (Hold) stock are expected to increase 16.6% for 2020.

Price and Consensus: PRIM



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